Systems and methods for bid/offer spread trading

ABSTRACT

A bid/offer spread market is presented that allows a trader to increase liquidity in traded items. A bid/offer spread market maker may make a bid/offer spread market. This bid/offer spread market may be made available to any market participant. In response to the spread market, an aggressor may respond to a bid or an offer with a hit or a take, respectively. In response to the hit or the take, the aggressor or bid/offer spread market maker, respectively, may create a separate underlying market using the selected (bid or offer) spread within a specified amount of time. The other party, a bid/offer spread trader, may trade on the quoted price within a specified amount of time, at which point a trade has occurred.

CROSS-REFERENCE TO RELATED APPLICATION

[0001] This application claims the benefit of U.S. provisionalapplication No. 60/280,668, filed Mar. 30, 2001, which is herebyincorporated by reference herein in its entirety.

BACKGROUND OF THE INVENTION

[0002] This invention relates to the trading of securities. Moreparticularly, this invention relates to systems and methods for tradingsecurities which increase the liquidity of the securities.

[0003] The cornerstone of economic activity is the production andconsumption of goods and services in a market economy. Economicefficiency and market performance are measured by the distribution ofsuch goods and services between a buyer and a seller.

[0004] The value of goods and services is usually expressed in acurrency of denomination, such as United States dollars. Such economicactivity extends beyond national borders. The trading of goods andservices occurs across international borders, creating a market in whichcurrency itself is traded and is governed by the laws of supply anddemand.

[0005] Throughout history, many different approaches have been adoptedto bring buyers and sellers of goods, services, and currency together,each with the key objective of permitting transactions at or as close aspossible to, the “market” price of the tradable item.

[0006] The market price is the price (in given currency terms) that afully educated market will transact select products. In order to achievethis, all potential buyers and sellers should have full and equal accessto the transaction. The buyer and seller transaction must be structuredto operate at very low costs or it will distort the market price of thetradable items with artificially high transaction costs. The keys toeffective buyer and seller transactions are full access of expressionand knowledge and low transaction costs. However, these are oftenconflicting yet necessitating trade-offs between trading efficiency andmarket knowledge.

[0007] Today, electronic matching and dealing systems have foundsuccessful applications in many trading activities, including the buyingand selling of a variety of items, such as goods, services, securities,and currency. Electronic trading systems have become popular for thetrading of securities, particularly for the trading of fixed-incomesecurities, such as United States Treasuries, United Kingdom Gilts,European Government Bonds, and Emerging Market debts, and non-fixedincome securities, such as stocks.

[0008] In a method of electronic trading, bids and offers are submittedby traders to a trading system. A bid indicates a desire to buy while anoffer indicates a desire to sell. These bids and offers are thendisplayed by the trading system to other traders. The other traders mayrespond to these bids and offers by submitting sell (or hit) or buy (orlift or take) commands to the trading system. A trade has been executedonce a trader has issued a hit or lift (or take) command in response toa bid or offer, respectively.

[0009] A market in which there is a high level of trading activity withthe ability to buy or sell with minimum price disturbance and relativeease is often described as a liquid market. While some securities can betraded often, other types of securities, particularly older securities,are more difficult to trade. A thinly traded market is often describedas an illiquid market because of the difficulty in trading a specificitem. It is difficult to obtain liquidity in a thinly traded market.

[0010] In view of the foregoing, it would be desirable to provide anelectronic market that enables a trader to obtain liquidity in a thinlytraded market.

SUMMARY OF THE INVENTION

[0011] It is an object of this invention to provide an electronic marketthat enables a trader to obtain liquidity in a thinly traded market.

[0012] This and other objects of the invention are realized in abid/offer spread market. The bid/offer spread market allows a trader toquote, or be quoted on, a security for a specified size with a definedbid or offer spread. The bid/offer spread market may be related to anunderlying security's market price, allowing someone seeking liquidityto make a market spread off an underlying spread for a specific amountof that specific security.

[0013] At least two participants are involved in a trade in thebid/offer spread market. Initially, one participant, known as abid/offer spread market maker, may make a bid/offer spread market. Thebid/offer spread market may contain a two-sided price (a bid spread andan offer spread) as well as bid and offer sizes. This market may be madeavailable to any market participant who wishes to participate in themarket. In response to the bid/offer spread market, a secondparticipant, known as an aggressor, may either “hit” the bid or “lift”(or “take”) the offer.

[0014] If the aggressor hits the bid, the aggressor may then be requiredto make a separate underlying market that is based on the bid spread andsize from the bid/offer spread market. The aggressor may be required tomake the separate underlying market within a specified amount of time.The separate underlying market may only be available to the bid/offerspread market maker. The bid/offer spread market maker, now referred toas the bid/offer trader, may then be obligated to hit or lift a bid oroffer in the separate underlying market within a specified time frame.

[0015] On the other hand, if the aggressor lifts the offer in bid/offerspread market, the bid/offer spread market maker may be required to makea separate underlying market that is based on the offer spread and sizefrom the bid/offer spread market. The bid/offer spread market maker maybe required to make the separate underlying market within a specifiedamount of time. The aggressor may then be obligated to hit or lift a bidor offer in the separate underlying market within a specified timeframe.

BRIEF DESCRIPTION OF THE DRAWINGS

[0016] The above and other objects and advantages of the invention willbe apparent upon consideration of the following detailed description,taken in conjunction with the accompanying drawings, in which likereference characters refer to like parts throughout, and in which:

[0017]FIG. 1 is a block diagram of a trading system in accordance withone embodiment of the present invention;

[0018]FIG. 2 is a hardware implementation of an electronic tradingmarket in accordance with FIG. 1 of the present invention;

[0019]FIG. 3 illustrates a detached trading view of an underlyingsecurity's market in accordance with the present invention;

[0020]FIG. 4 illustrates a detached trading view of a bid/offer spreadmarket presented to a market maker in accordance with the presentinvention;

[0021]FIG. 5 illustrates a detached trading view of a bid/offer spreadmarket presented to a market participant in accordance with the presentinvention;

[0022]FIG. 6 illustrates a detached trading view of a separateunderlying market in response to a hit in a bid/offer spread market inaccordance with the present invention;

[0023]FIG. 7 illustrates a detached trading view of a separateunderlying market in response to a quoted price from the trading view ofFIG. 6 in accordance with the present invention;

[0024]FIG. 8 illustrates a detached trading view of the separateunderlying market in response to a deal from the trading view of FIG. 7in accordance with the present invention;

[0025]FIG. 9 illustrates a detached trading view of a separateunderlying market in response to a take in accordance with the presentinvention;

[0026]FIG. 10 illustrates a detached trading view of a separateunderlying market in response to a quoted price from the trading view ofFIG. 9 in accordance with the present invention;

[0027]FIG. 11 illustrates a detached trading view of the separateunderlying market in response to a deal from the trading view of FIG. 10in accordance with the present invention;

[0028]FIG. 12 is a flow diagram of a trading process in markets inaccordance with one embodiment of the present invention; and

[0029]FIG. 13 is a flow diagram of a timing process in markets inaccordance with one embodiment of the present invention.

DETAILED DESCRIPTION OF THE INVENTION

[0030] The present invention is directed to systems and methods fortrading securities which increase the liquidity of the securities. Asillustrated in FIG. 1, systems and methods of the present invention maybe implemented as part of a trading system 100. More particularly, thepresent invention may be implemented in any or all of a market A 102, amarket B 104, and a market C 106. Market A 102, market B 104, and marketC 106 may represent different workstations or trading terminals withinthe same locality, in different cities within the same country, or indifferent countries. Trading may occur between any pairs of markets A,B, or C, between all three markets, or within the same market (e.g.,market A 102). Markets A, B, and C may individually be a trading systemor part of a larger trading system 100. The trading systems may be anysuitable trading system including an electronic trading system.

[0031] A central processing and distribution system 108 may connect eachof markets A 102, B 104, and C 106 via communication links 116.Communication links 116 may be any suitable communications mechanism(e.g., physical meeting, telephone, Internet, etc.) and medium (e.g.,air waves, coaxial cable, fiber optic cable, DSL line, wireless link,etc.). A vendor data service 110 may also be integrated into system 100via a communication link 116. In addition, clearing systems 112 and 114may also be provided to clear transactions within or between markets102, 104, and 106.

[0032]FIG. 2 illustrates a hardware implementation of market 102 thatfacilitates electronic trading. Market 102 may include one or more localworkstations 150 and one or more remote workstations 166. Workstations150 and 166 may be any suitable means for presenting data and, inpreferred embodiments, accepting participant input. Each workstation mayenable a participant to engage in the trading process. For example,workstations 150 and 166 may be personal computers, laptop computers,mainframe computers, data displays, Internet browsers, etc.

[0033] The trading process may preferably be controlled by a server 154.Server 154 may be any suitable computer or server, such as a network orInternet server. Server 154 may be connected to workstations 150 by anetwork 152. Server 154 may also be connected to workstations 166 by anetwork 156, a communications device 158, a communication link 160, aremote server 162, and a network 164. Networks 152 and 156 may be anysuitable network, such as the Internet. Similarly, communications device158, link 160, remote server 162, and network 164, which may be anysuitable components of a computer network for enabling workstations 166to connect to server 154, may be eliminated in part or whole, or may besupplemented by additional components. Although a specific arrangementis shown for connecting workstations 166 to server 154, any suitableconfiguration may be used in accordance with the present invention.

[0034] As shown in FIG. 2, a telephone network 174 may also be provided.Telephone network 174 may include a local telephone 168 and a remotetelephone 172 which are connected via a telephone line 170. Telephonenetwork 174 may be used to enable participants at a remote location tocommunicate with participants at workstations 166. This may be usefulwhen the participants at the remote locations do not have workstations166 at their disposal, when the participants at the remote locationshave display-only workstations 166, or when the participants prefer touse a broker (using telephone 168) at a workstation 150.

[0035] FIGS. 3-11 illustrate detached trading views of markets inaccordance with the present invention. The markets may enable a traderto increase liquidity of securities (or any other suitable tradeableitem). A trade in these markets may involve at least two traders. Onetrader, typically known as a bid/offer spread market maker, may make abid and offer spread in the markets. A second trader, typically known asan aggressor, may respond to the bid or offer spread by submitting a hitor take (or lift), respectively. Depending on the type of response, thebid/offer spread market maker or the aggressor may be required to actnext.

[0036]FIG. 3 illustrates a detached trading view 200 of the market foran underlying security. The market may contain any suitable informationabout item 202, such as a current market price 204, a market size 206,etc. For item “Z” 202, the current market price 204 is “104.01-104.05+.”

[0037] This is known as the bid/offer price in which 104.01 (the numberto the left of the hyphen) represents the bid price, while 104.05+(thenumber to the right of the hyphen) represents the offer price. The sizeof item Z “5×5” may represent the bid and offer size, respectively, ofthe current market. The size may represent the value in the hundreds(i.e., ×100), thousands (i.e., ×1,000), or millions (i.e., ×1,000,000).

[0038] The market data may be available to all possible traders. Atrader seeking liquidity may make a spread market (e.g., for item Z) fora specified amount of that specific security. This trader, referred toas a bid/offer spread market maker, may initiate a bid/offer spreadmarket by using a mouse to click on BOSM button 208. The bid/offerspread market may also be initiated by selecting function keys on akeyboard, or using any other suitable device.

[0039] Once the market maker has initiated the bid/offer spread market,the market maker may be prompted to select an item and to enter a marketspread and size for a bid and offer. The bid and offer spreads may bethe same value or different. The bid and offer sizes may be the same ordifferent from each other and the underlying securities market sizes.

[0040]FIG. 4 illustrates a detached trading view 250 that may be shownto the bid/offer spread market maker after making the bid/offer spreadmarket. The market price and size from the underlying security's marketmay be displayed in detached trading view 250. In the leftmost column252 may be any suitable identifier for identifying the trader (e.g., “S”for spread market maker). In the same row as the trader identifier “S”may be the bid/offer spread market maker's bid/offer spread 254 (e.g.,0.01-0.02) and size 256 (e.g., 100×200). The bid has a size of 100 at aspread of 0.01 and the offer has a size of 200 at a spread of 0.02. Thesize may preferably be all or none (AON) (i.e., the item may only betraded exactly at the specified size), although any other suitabletrading protocol may be used. The bid/offer spread market maker may thenpress a “Bid/Offer” button 260 to make the bid/offer spread marketavailable to other market participants. The bid/offer option may beselected by using a mouse to click on button 260 in detached tradingview 250, by selecting a control function on a keyboard (e.g., Control-Sfor Bid/Offer), or by using any other suitable approach.

[0041]FIG. 5 illustrates a detached trading view 300 of a bid/offerspread market that may be displayed to other market participants. Amarket participant, or aggressor, may respond to the bid/offer spreadmarket by selecting either a “Hit” button 302 (to respond to the bidspread and size) or a “Take” (or Lift) button 304 (to respond to theoffer spread and size). Once the aggressor has responded to a bid oroffer spread with a hit or take, respectively, the rest of the tradeprocess may preferably be available only to the aggressor and thebid/offer spread market maker.

[0042]FIG. 6 illustrates a detached trading view 350 of a separateunderlying market displayed to the aggressor after “Hit” button 302(FIG. 5) has been selected. The aggressor's response may be displayedwith the participant's identifier 352 (e.g., “A” for aggressor), and theresponse 354 and 356 (a Hit at a spread 0.01 and a size of 100). Alsodisplayed on detached trading view 350 may be a timer 360 indicating thetime (e.g., in seconds) remaining in which the aggressor may specify aseparate underlying market. The separate underlying market may be madeby selecting a “Quote Price” button 358. Once button 358 has beenselected, the aggressor (known as the separate underlying market makerat this step) may be prompted to enter a market price and size utilizingthe bid spread and size from the bid/offer spread market. Any suitableprice may be used. In some embodiments, the market price spread may berequired to range from any two values.

[0043]FIG. 7 illustrates a detached trading view 400 of the separateunderlying market displayed to the bid/offer spread market maker afterthe aggressor has made the separate underlying market. The selectedmarket spread 402 is “104.02-104.03” (spread of 0.01) and the size 404is “100×100” (bid and offer sizes 100). Also displayed in detachedtrading view 400 may be a timer 408 indicating the time (e.g., inseconds) remaining in which the bid/offer spread market maker (known asthe bid/offer spread trader at this step) may trade on the quoted price.The bid/offer spread trader may trade on the quoted price by selectingeither the bid or the offer and then by pressing “Deal” button 406.

[0044]FIG. 8 illustrates a detached trading view 450 of the resultingtrade. The bid/offer spread trader has obtained 100 units 454 (in thehundreds, thousands, or millions) of item Z at a price 452 of 104.02 perunit.

[0045]FIG. 9 illustrates a detached trading view 500 of a separateunderlying market displayed to the bid/offer spread market maker if“Take” button 304 is selected from trading view 300 of FIG. 5. Theaggressor's response may be displayed with the participant's identifier502 (e.g., “A”), and the response 504 and 506 (a Take at a spread of0.02, and a size of 200). Also displayed in detached trading view 500may be a timer 510 indicating the time remaining in which the spreadmarket maker may specify a separate underlying market. The separateunderlying market may be made by selecting “Quote Price” button 508.Once button 508 has been selected, the spread market maker (known as theseparate underlying market maker at this step) may be prompted to entera market price and size utilizing the offer spread and size from thebid/offer spread market.

[0046]FIG. 10 illustrates a detached trading view 550 of the separateunderlying market displayed to the aggressor after the separateunderlying market maker has made the separate underlying market. Theselected market spread 552 is “104.02-104.04” (spread of 0.02) and thesize 554 is “200×200” (bid and offer sizes of 200). Also displayed indetached trading view 550 may be a timer 558 indicating the timeremaining in which the aggressor (or bid/offer spread trader) may tradeon the quoted price. The aggressor may select the desired market price552 by selecting either the bid or the offer and then by pressing “Deal”button 556.

[0047]FIG. 11 illustrates a detached trading view 600 of the resultingtrade. The aggressor has obtained 200 units 604 (in the hundreds,thousands, or millions) of item Z at a price 602 of 104.04 per unit.

[0048]FIG. 12 is a flow diagram of the trading process 700 in markets inaccordance with the present invention. Process 700 begins at step 702with an underlying security's market listing the current market makerprices and sizes. At step 704, a bid/offer spread market maker may makea bid/offer spread market. The spread market may include a bid/offerspread as well as a size for both a bid and offer. This spread marketmay be available to all market participants.

[0049] At step 706, an aggressor may respond to the spread market bysubmitting a hit command or a take (or lift) command. If a hit commandis submitted, the aggressor may be required to make a separateunderlying market by quoting a market at the bid spread and size at step708. The bid/offer spread market maker may then trade on the quotedprice at step 710 and the process ends at step 712. If a take command issubmitted, the bid/offer spread market maker may be required to make aseparate underlying market by quoting a market at the offer spread andsize at step 714. The aggressor may then trade on the quoted price atstep 716 and the process ends at step 718.

[0050]FIG. 13 is a flow diagram of the use of timers in these markets.Process 800 begins at step 802 with a bid/offer spread market beingcreated by a bid/offer spread market maker. At step 804, an aggressormay respond to the bid/offer spread market with a hit or take (or lift).

[0051] Once the aggressor submits a hit or take command, timer onebegins at step 806. At step 808, process 800 checks to see if theseparate underlying market maker has quoted a price and a size. If theaggressor responded with a hit in step 804, the separate underlyingmarket maker is the aggressor. If the aggressor responded with a take instep 804, the separate underlying market maker is the bid/offer spreadmarket maker.

[0052] If the price has not been quoted, process 800 determines whethertimer one has ended at step 810. If timer one has not ended, process 800moves back to step 808. However, if timer one has ended, process 800moves to step 812 where the separate underlying market maker may belocked-out from the bid/offer spread market for a configurable amount oftime and then process 800 ends at step 814. If the price has beenquoted, process 800 moves to step 816 where timer one ends. At step 818,timer two begins. Timer one and timer two may be for the same timeperiod or may be set for different time periods. Next, at step 820,process 800 determines whether the bid/offer spread trader has traded onthe quoted price. The bid/offer spread trader may be either thebid/offer spread market maker or the aggressor depending on the type ofresponse to the bid/offer spread market made by the aggressor. For ahit, the bid/offer spread trader is the bid/offer spread market maker,and for a take, the bid/offer spread trader is the aggressor.

[0053] If there has not been a trade on the quoted price, process 800moves to step 822 where the process determines whether timer two hasended. If timer two has not ended, the process moves back to step 820.However, if timer two has ended, process 800 moves to step 824 where thebid/offer spread trader may be locked-out from the bid/offer spreadmarket for a configurable amount of time and the process ends at step826. If a trade has occurred, timer two ends at step 828 and the processends at step 830.

[0054] Although steps 812 and 824 illustrate steps in which a trader islocked out of a market for not promptly reacting to the market, anyother suitable action may be taken. For example, fees may be paid to theother trader or system operator, default trades may be automaticallyentered, etc. When default trades are entered, these trades may begenerated to give the other trader the best prices that the underlyingsecurity market will support.

[0055] Thus it is seen that systems and methods for trading securitieswhich increase the liquidity of the securities are provided. One skilledin the art will appreciate that the present invention can be practicedby other than the described embodiments, which are presented forpurposes of illustration and not of limitation, and the presentinvention is limited only by the claims which follow.

What is claimed is:
 1. A method for executing a trade for a tradableitem, comprising:receiving a first trading command from a first party tomake a spread market for the tradable item; receiving a second tradingcommand from a second party in response to the spread market; when thesecond trading command is a hit command, receiving from the second partya third trading command to make a price/size market for the tradableitem and receiving a fourth trading command from the first party inresponse to the price/size market; and when the second trading commandis a take command, receiving from the first party a third tradingcommand to make a price/size market for the tradable item and receivinga fourth trading command from the second party in response to theprice/size market.
 2. The method of claim 1, further comprisingrequiring the second party to submit the third trading command within agiven time period from receipt of the second trading command
 3. Themethod of claim 2, further comprising blocking the second party fromparticipating in a market when the third trading command is not receivedwithin the given period of time.
 4. The method of claim 2, furthercomprising charging a fee to the second party when the third tradingcommand is not received within the given period of time.
 5. The methodof claim 2, further comprising automatically entering a default tradingcommand from the second party as the third trading command when thethird trading command is not received within the given period of time.6. The method of claim 1, further comprising requiring the first partyto submit the third trading command within a given time period fromreceipt of the second trading command.
 7. The method of claim 6, furthercomprising blocking the first party from participating in a market whenthe third trading command is not received within the given period oftime.
 8. The method of claim 1, wherein the spread market comprises abid side and an offer side.
 9. The method of claim 8, wherein the bidside comprises a spread and a size.
 10. The method of claim 8, whereinthe offer side comprises a spread and a size.
 11. The method of claim 1,wherein the price/size market comprises a bid and an offer.
 12. Themethod of claim 11, wherein the bid comprises a price and a size. 13.The method of claim 11, wherein the offer comprises a price and a size.14. A system for executing a trade for a tradable item, comprising:first workstation that receives a first trading command from a firstparty to make a spread market for the tradable item; a secondworkstation that receives a second trading command from a second partyin response to the spread market; and a server that: when the secondtrading command is a hit command, receives from the second workstation athird trading command to make a price/size market for the tradable itemand receives a fourth trading command from the first workstation inresponse to the price/size market; and when the second trading commandis a take command, receives from the first workstation a third tradingcommand to make a price/size market for the tradable item and receives afourth trading command from the second workstation in response to theprice/size market.
 15. The system of claim 14, wherein the server alsorequires the second party to submit the third trading command within agiven time period from receipt of the second trading command.
 16. Thesystem of claim 15, wherein the server also blocks the second party fromparticipating in a market when the third trading command is not receivedwithin the given period of time.
 17. The system of claim 15, wherein theserver also charges a fee to the second party when the third tradingcommand is not received within the given period of time.
 18. The systemof claim 15, wherein the server also automatically enters a defaulttrading command from the second party as the third trading command whenthe third trading command is not received within the given period oftime.
 19. The system of claim 14, wherein the server also requires thefirst party to submit the third trading command within a given timeperiod from receipt of the second trading command.
 20. The system ofclaim 19, wherein the server also blocks the first party fromparticipating in a market when the third trading command is not receivedwithin the given period of time.
 21. The system of claim 14, wherein thespread market comprises a bid side and an offer side.
 22. The system ofclaim 21, wherein the bid side comprises a spread and a size.
 23. Thesystem of claim 21, wherein the offer side comprises a spread and asize.
 24. The system of claim 14, wherein the price/size marketcomprises a bid and an offer.
 25. The system of claim 24, wherein thebid comprises a price and a size.
 26. The system of claim 24, whereinthe offer comprises a price and a size